Piper Jaffray Companies — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The filing is for Piper Jaffray Companies; the supplied company label “Piper Sandler Companies” does not match the registrant name on this filing. Financial amounts are U.S. dollars.
Business context
The firm operated Capital Markets and Asset Management businesses, providing investment banking, institutional brokerage, and asset-management services. Hong Kong operations and FAMCO were reported as discontinued operations; FAMCO was sold on April 30, 2013.
Financial performance
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 |
|---|---|---|
| Total revenues | $109.1 million | $227.3 million |
| Net revenues | $99.8 million | $209.3 million |
| Pre-tax income from continuing operations | $3.3 million | $21.5 million |
| Net income attributable to Piper Jaffray Companies | $2.5 million | $12.6 million |
| Diluted EPS | $0.15, including discontinued operations | $0.73, including discontinued operations |
| Pre-tax operating margin | 3.3% | 10.3% |
Continuing-operations diluted EPS was $0.25 for Q2 and $0.86 for the first half. Q2 consolidated net loss was $0.2 million, while income attributable to the company was $2.5 million, reflecting allocations to noncontrolling interests. Discontinued operations reduced company-attributable income by $1.9 million in Q2 and $2.4 million in the first half; the first-half amount included a $1.9 million after-tax loss on the FAMCO sale.
Segment results: Q2 Capital Markets net revenues fell 6.6% to $81.8 million and recorded a $2.1 million pre-tax loss (versus $1.8 million income a year earlier). Asset Management net revenues rose 15.8% to $18.0 million, with pre-tax income up 41.0% to $5.5 million. For the first half, Capital Markets pre-tax income declined 15.2% to $10.6 million; Asset Management pre-tax income increased 30.2% to $10.9 million.
Cash flow, balance sheet and funding
- Cash from operating activities was negative $123.1 million in the first half, compared with negative $285.5 million in the comparable 2012 period. Cash and cash equivalents ended June at $69.3 million, down from $105.4 million at year-end. An additional $27.0 million was segregated for regulatory purposes and available exclusively for customer liabilities.
- Total assets were $2.276 billion and total liabilities were $1.408 billion at June 30. Short-term financing was $542.8 million; variable-rate senior notes were $125 million. The notes bear variable rates and mature in 2014 and 2015. The company reported compliance with note covenants.
- Short-term financing increased from $477.0 million at year-end. It included $348.9 million of secured commercial paper, $141.9 million under a prime-broker arrangement, and $52.0 million under uncommitted secured bank lines. The $250 million committed revolving facility had no borrowings outstanding.
- Regulatory net capital was $156.5 million, $155.5 million above the SEC minimum. The company reported leverage of 2.6 times and adjusted leverage of 3.6 times, up from 3.5 times at year-end.
Material changes and management commentary
- Q2 net revenues decreased 3.2% year over year; first-half net revenues decreased 3.3%. Q2 institutional brokerage revenue declined 34.1%, mainly due to a sharp fall in fixed-income revenue, while investment banking and asset-management revenue increased.
- Management attributed fixed-income weakness to rapid interest-rate increases, widening credit spreads, and market volatility. Hedges moved directionally as intended but did not offset all inventory losses as correlations weakened. Total VaR at June 30 was $1.9 million, versus $1.0 million at December 31, 2012; trading losses exceeded one-day VaR once in the first half.
- Q2 2012 results benefited from a $7.1 million tax benefit from resolving a state tax matter and included a $3.6 million pre-tax restructuring charge. First-half 2013 expenses included insurance proceeds reimbursing prior legal settlements; the filing does not specify the proceeds amount.
- Management expected a gradual U.S. recovery and potentially favorable capital-markets activity, but warned that Federal Reserve policy, interest rates, the debt-ceiling debate, tax changes, and market volatility could make the second half challenging. Advisory activity was expected to improve, while asset-management revenue remained dependent on markets, investment performance, and client flows. No earnings guidance was provided.
- After quarter-end, Seattle-Northwest was acquired for $19.5 million cash on July 12; Edgeview Partners was acquired on July 16, with terms not disclosed. Management expected $3.0–$3.5 million of restructuring and integration costs in the second half of 2013 and additional intangible amortization.
- The company had $36.1 million of remaining private-equity investment commitments. Municipal-derivatives antitrust and securities investigations and related litigation were considered reasonably capable of a material loss, but the company could not estimate a loss range and recorded no reserve. Separately, the FAMCO sale indemnity for an SEC proceeding was valued at $3.0 million at June 30; potential payments under the agreement were not capped.
Important facts for investors to verify
- Confirm the registrant identity: this 10-Q names Piper Jaffray Companies, not Piper Sandler Companies.
- Review the source and sustainability of first-half operating cash outflow, the increase in inventory and short-term financing, and reliance on collateralized or discretionary funding.
- Assess fixed-income inventory valuation, hedging effectiveness, elevated VaR, and the concentration of $24.3 million in uncollateralized derivative credit exposure, including $12.4 million with one counterparty.
- Track the amount and timing of potential FAMCO indemnity payments, the municipal-derivatives proceedings, and the integration costs and performance of the two post-quarter acquisitions.
- Separate recurring operating performance from the 2012 tax benefit, 2012 restructuring charge, 2013 insurance recoveries, investment gains, and discontinued-operation losses.